Investing Cash in a DST Without a 1031 Exchange

The securities rules, not the tax rules, decide whether you can buy

A 1031 exchange is a tax event, and a DST does not require one. What a DST does require is compliance with the securities exemption it is sold under. Offerings made under Rule 506(c) may sell only to accredited investors whose status the sponsor has verified, and offerings under Rule 506(b) are in practice sold the same way, so a cash buyer faces exactly the test an exchanger faces; accredited investor rules for DSTs sets out the net worth and income thresholds and the documents sponsors ask for.

The exemption also explains why you cannot browse a list. Rule 502(c) bars general solicitation, so a firm needs a relationship and a suitability file before it shows you a live trust, and Rule 502(d) makes the interest a restricted security that cannot be resold without registration or another exemption. Only a registered broker-dealer or investment adviser may put one in front of you, and Regulation Best Interest obliges them to test it against your investment profile first.

Say the risk plainly before the mechanics. A DST interest has no public market, the trust sells when its sponsor decides, distributions can be reduced or stopped, and the cash you invest can be lost. The cash-buyer case for and against a DST makes the comparison with listed alternatives.

No deadlines changes how you choose: you can wait for the right trust and stage in

An exchanger must put names on a list by day 45 and close by day 180, so the trusts open during that window are the only ones that exist for them. A cash buyer has no window. You can subscribe to a trust raising equity this month, wait for the next one from the same sponsor, or spread the money across several closings over a year as offerings in different sectors and states appear.

The limit on patience is the trust itself. Under the agreement described in Rev. Rul. 2004-86 the trustee may not accept additional contributions once the offering closes, so a cash buyer who wants more of a trust that has sold out waits for the sponsor's next trust, not a reopening.

Cash can also sit beside exchange money. A seller who exchanged part of a sale and kept the rest can put personal cash into the same trust as a separate subscription with its own cost basis, and sponsors often state a lower floor for cash than for exchange proceeds in the Form D, so ask each offering for its cash minimum rather than assuming the exchange figure.

Your basis is cost, your depreciation starts over, and your share of the rent goes on Schedule E

Rev. Rul. 2004-86 treats each beneficial owner as a grantor who owns an undivided fraction of the trust's property under sections 671 and 677, so the trust's rent, expenses and depreciation are yours in proportion. The sponsor sends an annual grantor statement rather than a Schedule K-1 or a Form 1099-DIV, and you carry the figures to Schedule E, as IRS Publication 527 directs for rental income; DST tax forms and reporting shows what the statement looks like.

Because you paid cash, your basis is what you paid, allocated between land and building. Publication 527 depreciates residential rental property over 27.5 years under the general depreciation system and excludes land entirely, so the building share of your subscription produces a deduction every year from the date of purchase.

The income is passive. IRS Publication 925 treats a rental activity as passive even if you materially participate, and losses from a passive activity are deductible only against passive income, with the excess carried forward. Section 1411 adds 3.8 percent on rents and on gain from the sale for taxpayers above $250,000 of modified adjusted gross income on a joint return or $200,000 otherwise. Property in a state with an income tax can add a nonresident return.

Worked model: $300,000 of cash, 80 percent building, and what the depreciation shelters

Hypothetical, round numbers. You invest $300,000 in an all-cash trust holding apartments, and the sponsor's allocation puts 80 percent of the price on the building. Your depreciable basis is $240,000, which over 27.5 years is about $8,700 a year. Whatever your share of the trust's net rental income turns out to be, the first $8,700 of it is offset by depreciation and only the remainder is taxable, as passive income on Schedule E.

Suppose the trust sells after seven years and your share of the net proceeds is $330,000. You have taken about $61,000 of depreciation, so your adjusted basis is $239,000 and your gain is $91,000: $61,000 of unrecaptured section 1250 gain taxed at up to 25 percent, and $30,000 of long-term gain taxed at 0, 15 or 20 percent depending on where your income falls against the thresholds in Rev. Proc. 2025-32, plus net investment income tax where it applies.

The alternative at that point is the exchange you never needed on the way in. You own an undivided interest in real property, so the trust's sale can be the relinquished side of a 1031 into the next trust or a building, which exchanging from one DST into another covers. Put your own bracket and state into these figures with your CPA before you treat them as a forecast; they are not one.

Why cash investors are placed differently, and which of three structures fits

An exchanger's replacement is dictated by arithmetic: enough value to cover the net sale price and enough trust-level debt to replace the loan paid off. A cash buyer has neither constraint, so a financed trust is a choice rather than a necessity, and a choice that adds interest-rate and refinancing risk. The default placement for cash is therefore an all-cash traditional DST, with a financed trust only where the buyer wants leverage and understands what it does to distributions and to the risk of loss.

Where the cash came from changes the answer. If it is the proceeds of a capital gain, on stock, a business or real estate, section 1400Z-2 lets you elect to defer the gain by investing it, and only the gain, in a qualified opportunity fund within 180 days of the sale; that is the opportunity zone fund path, and a DST cannot do it. If the cash is simply savings but you have passive income from other rentals or partnerships, the deduction from a bonus depreciation fund can offset that income under the passive activity rules, which a DST's slower 27.5-year schedule cannot match.

Retirement money is a fourth case with its own custodian and unrelated business income rules, covered in buying a DST inside a self-directed IRA.

• Cash with no gain behind it and no passive income to shelter: an all-cash DST, sized so you will not need the money back for years.
• Cash that is the gain from a recent sale: an opportunity zone fund inside the 180 days, for the gain only.
• Cash plus passive income you want to offset: a bonus depreciation fund, with your CPA confirming the passive-loss arithmetic.
• Cash inside an IRA or solo 401(k): an all-cash DST through the custodian.